I am currently teaching a
seminar on credit cards, so I was thrilled to present on the work of a major
thinker in the field. If there’s one person whose name is synonymous with the
behavioral economics of credit cards, it’s Oren Bar-Gill. His work has been
influential within the academy and outside of it. The recent federal overhaul of
credit card law, The Credit Card Accountability Responsibility and
Disclosure Act of 2009(CARD Act),
was heavily influenced by law and behavioral economics. (Here’s another CARD
Act link for those who want a summary instead of the whole statute.) Credit cards are
also a great topic for Contracts, because with credit cards, contract
design is the entire game.

The credit card chapter in Seduction by Contract is very
successful. If you want a primer on exactly what the trouble is with credit
cards, this chapter is perfect place for you. The crux of Bar-Gill’s argument
is that credit card issuers use complexity and cost deferral to seduce consumers
into borrowing more in the short-term than they would prefer in the long-term.
He illustrates how specific credit card pricing features play into the
imperfect rationality of optimism-biased consumers. He concludes by discussing
the recent CARD Act and with policy proposals centered on use disclosure.

Convincing people that credit
card contracts are complex is an easy sell. One way Bar-Gill does so is by
simply listing all the of types fees consumers can pay (i.e., overlimit fees or
application fees). There are nineteen of them. And this number doesn’t even
include types of interest. I can also add that in my seminar, we have a day in
which I ask the students to find and read a credit card contract. Student
routinely say that this is the hardest reading they have done in law school.

What’s even more interesting
than the complexity itself is the purpose of it. Credit card issuers use
complexity as a way of shielding their pricing model from consumers. Issuers
provide benefits through short-term, more salient product features (like teaser
rates and rewards) and assess costs through long-term, less salient product
features (like late fees and default interest rates). This pricing structure
enables – or rather requires – issuers to compete for consumers via deception.

Bar-Gill’s policy proposal,
use disclosure, addresses this deception directly. Use disclosure would require
credit card issuers to give consumers information on how they use their credit
cards. The CARD Act does some of this, but Bar-Gill proposes taking it further.
Under Bar-Gill’s proposal, consumers would receive an electronic file that they
could take to a new issuer or an intermediary, like Bill Shrink,
to get a new total-cost credit card quote. Use disclosure seems like a great
way to encourage consumer behavioral learning. My one critique is that
consumers would have to learn the hard way. I think that many consumers would
have to get in real trouble with credit cards before the behavioral learning
would take place.

This is why my only
disappointment with the chapter is that Bar-Gill stopped with use disclosure. I
wanted to see him explore the CARD Act in more detail and offer more policy
ideas. So I’ll end this blog post as I ended my talk, with a plug to read his paper
with Ryan Bubb,
Credit Card Pricing: The Card Act and Beyond (Cornell L. Rev., 2012), which
addresses both of those points and more.